Wednesday, April 11, 2012

Goldman's US housing index

Goldman has developed an index that tracks the percentage of US metropolitan area zip codes with rising house prices. Rather than tracking the median home price nationally as some indices do, this approach zooms in on the dynamics of house prices at the micro level. A particular metropolitan area may have declining prices on average, but that doesn't tell you if the declines are across the board or only in certain areas.

GS: Using these highly disaggregated house price data, we created a simple index which measures the fraction of ZIP codes that experienced rising house prices over the last year (we experimented with a variety of weighted indexes but they were very similar and so we chose the simple unweighted version for simplicity)

The index doesn't need to be adjusted for inflation nor does it require seasonal adjustments because it looks at house price appreciation on a year-on-year basis.

Source: GS (click to enlarge)

This Zip Code index is also a good indicator of "overbought" housing conditions - a 95% reading for example maybe a good level to become cautions on the asset class even if the median price continues to rise. The index also picked up the start of US housing recession in late 06/early 07, long before the start of the full economic recession.

The 09-10 spike was due to the homebuyer tax credit. The latest index measure shows that 20% of zip codes currently reporting house price appreciation. It's an abysmal result, showing a struggling market. However it is more helpful than a standard price index in terms of capturing US housing market dynamics in a single number.